Will protests derail Jordan's reform agenda?

Added on
16/08/2018

(The Banker) -- The protests over tax reforms that have hit Jordan in recent months and brought about the resignation of its prime minister set alarm bells ringing in the West, as well as the wider Middle East. Adrienne Klasa examines how one of the region's most stable countries can now move forward.

On May 30, protesters took to the streets in cities across Jordan. Over the days that followed, crowds of thousands congregated in the largest mass protests in the Middle East since the Arab Spring, setting off alarm bells across the region.

The protests highlight how little political room Jordan’s government has to manoeuvre as it tries to face down a grinding economic crisis and mounting public anger over austerity measures.

“Creating a pro-business environment requires continuous reform to remove existing or impending impediments,” the then prime minister Hani Mulki told a crowd of business leaders at a forum on May 10.

Protest power

That now looks to be a vision delayed, if not denied. The government capitulated to protesters and Mr Mulki resigned on June 4. He has been replaced by Omar Razzaz, who has pledged to roll back the tax increases that sparked the outcry.

This will be Jordan’s sixth government since 2011 – hardly a hallmark of stability. Yet compared to much of the region, Jordan is a bastion of relative calm. Gulf neighbours and Western allies, particularly the US, want it to stay that way and are willing to pay out to make it so.

On June 11, Gulf neighbours led by Saudi Arabia announced a $2.5bn aid renewal package to help quell Jordan’s crisis. Qatar announced a further $500m in support. However, these gestures represent little more than a stopgap measure.

“Jordanians have to do the reforms, that is the only thing that is going to help stabilise debt dynamics at the end of the day. At the same time the aid is quite necessary as it extends aid from the past that was not going to be renewed,” says Alexander Perjessy, a vice-president and senior analyst at rating agency Moody’s.

Since January, there have been price hikes on basic staples such as bread. This, combined with the government phasing out subsidies, high fuel prices (subsidies on fuel ended in 2012) and amendments to the income tax law (which will see personal rates go up by 5% and corporate rates increase to between 20% and 40%) are all fuelling popular discontent.

The austerity measures are not simply unfeeling dictates from the Jordanian government. They are part of a $723m extended fund facility package struck with the International Monetary Fund in 2016 in a bid to stabilise the country’s finances.

Only 3% of Jordanians pay personal income tax, with a threshold that is three times gross domestic product (GDP) per capita – the lowest in the Middle East. As a result, personal income taxes only account for 0.4% of Jordan's GDP.

Under strain

Jordan’s extremely low revenue mobilisation stands out even in a region known for rentier states that offer citizens largely subsidies and services while taxing them very little in exchange for political acquiescence. Its other options for fiscal consolidation are very limited.

According to analysts at Moody’s, new tax proposals will yield significantly less revenue compared with the original amendments. The government had hoped to add $423m in revenues per year. That now looks unlikely.

The economic grievances of the average Jordanians who came out to protest are not without foundation, nor is the government’s sense of urgency as it pushes austerity. The country’s debt rose to a record 96% of GDP in 2017 (up from 70% in 2011), while unemployment stands at 18.5%.

Regional instability weighs on growth. An influx of refugees, mostly fleeing civil war in Syria, means that refugees now account for 20% of Jordan's population. Many cannot work though reforms are now under way to expand opportunities. In the short term, however, this has been a drag on public finances. Social benefits have risen by 50% since Syria’s civil war started in 2011.

Other resources are also stretched thin. “Jordan has water for 2 million people, but we are now 9.5 million,” says Dureid Mahasneh, chairman of Jordanian water and energy conservation think tank Edama.

“Locally we are not politically mature to the degree that the private sector would have an impact on the government” when proposing solutions such as building desalination plants in the southern port of Aqaba, he argues. While desertification is increasing over time, he believes that poor water management is also exacerbating the situation.

Regional instability

The conflicts in Iraq and Syria, beyond breeding potentially contagious instability, are also scuppering trade in Jordan. Both borders have been closed at various times over the past few years.

“In 2000 to 2009 we were growing at 6.8%. Today, average growth is about 2.1% and the main reason for that is the closure of the natural markets [in Iraq and Syria],” says Muhannad Shehadeh, Jordan’s minister of state for investment affairs.

In 2010, Syria and Iraq absorbed about one-fifth of Jordan’s exports. Between 2014 and 2016, exports to the two countries fell by about 68%. It came at a time when the Islamic State took over swathes of territory and Jordan closed its borders. Exports to Syria alone fell from $239m in 2010, before the civil war, to $26m in 2017.

The Karameh crossing with Iraq reopened in August 2017. However, the Nabih crossing with Syria remains closed and on high alert, stifling a profitable trade route that once conveyed tens of thousands of trucks every year transporting goods between Turkey and the Gulf.

As many problems as some of Jordan’s neighbours are causing, others are waking up to its plight, however. Israel fears a destabilised Jordan will provide an opening for Iran to extend its influence. Saudi Arabia and other Gulf states, meanwhile, do not like the idea of instability in a neighbouring monarchy.

The aid argument

Jordan is resource poor and has long survived by extracting strategic rents from Gulf neighbours and the US, which currently uses the country as a base for operations funnelling money and supplies to ‘vetted’ Syrian rebel groups.

The US also views Jordan as a key player in the Trump administration’s roadmap to a peace deal for Israel and the Palestinian territories. Jared Kushner, Donald Trump’s son-in-law and adviser, and Jason Greenblatt, the US's Middle East envoy, travelled to Jordan capital Amman to meet with King Abdullah II on June 19, one day after he received Israeli prime minister Binyamin Netanyahu.

The US renewed its budgetary grants to the country at the beginning of 2018 for a three-year period. Regional supporters acted more slowly. Saudi Arabia had held Gulf partners back from renewing a $5bn aid package extended in 2011.

Indeed, rifts have opened between Riyadh and Amman recently. Jordan’s hesitation to cut ties with Qatar – which Saudi Arabia and its allies have blockaded since June 2017 over alleged terrorist links – have played a part. As the street protests grew, however, two neighbours stepped up to offer financial support: Kuwait, then Qatar. The latter finally spurred the Saudis in action. Fearing Jordan would align itself with the Qataris, they convened a summit. Together with Kuwait and the United Arab Emirates, Saudi Arabia announced a five-year $2.5bn aid package for Jordan on June 11. Qatar separately pledged a further $500m.

While some details remain unclear, the funding will include a direct deposit in the Central Bank of Jordan, guarantees to the World Bank and annual budget support. The breakdown of funds has not been made public. “It will be quite important that a good chunk that [aid package] comes in form of budgetary support,” says Mr Perjessy at Moody’s. However these measures may only temporarily paper over the country’s structural issues.

Government plans

While the external support is vital, Jordan’s government has plans of its own. The country is keen to capitalise on its identity as secular, pro-Western and stable to attract foreign investment – three features not readily found in the Middle East.

Officials are also very keen to position Jordan as a hub for the eventual reconstruction of Iraq and Syria. If the example of Iraq’s last reconstruction after the 2003 invasion is anything to go by, this promises to be a highly lucrative undertaking – though historically the results could only generously be termed mixed.

“The rebuilding process is extremely important for us… What is being done is to create the proper tools to take advantage of that,” says Mr Shehadeh.

A development zone is already under construction near Mafraq, 15 kilometres from the Syrian border and 200 kilometres from Iraq, complete with a special economic zone and airstrip. Tax incentives are also in place for would-be investors.

More broadly, the country is keen to trumpet itself as a base for business with a far wider reach than its domestic market of 10 million. Jordan has free-trade agreements with the US and the EU, where it has been granted simplified rules of origin requirements in order to help boost exports into the eurozone. “People are using Jordan as a platform to reach out to the world,” says Mr Shehadeh.

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